What Is an SEC Deferred Prosecution Agreement?

In recent years, the U.S. Securities and Exchange Commission (SEC) has increasingly offered deferred prosecution agreements to companies and individuals accused of securities law violations. When facing the potential for civil or criminal prosecution by the SEC and the U.S. Department of Justice (DOJ), securing a deferred prosecution agreement can provide a favorable resolution — though it is still imperative to ensure that the terms of the agreement are fair and reasonable.

The SEC’s use of deferred prosecution agreements began in 2010. One year after the DOJ began employing non-prosecution agreements under its Foreign Corrupt Practices Act (FCPA) Corporate Enforcement Policy, the SEC announced its new Cooperation Initiative. These measures included both deferred prosecution agreements and non-prosecution agreements.

A deferred prosecution agreement is a written agreement between the Division of Enforcement and a company in which the Division agrees to forego an enforcement action against the company if, among other things, the company agrees to certain undertakings, or changes in behavior.

Deferred Prosecution Agreements in SEC Cases

Deferred prosecution agreements offer advantages for both companies and the U.S. government. A deferred prosecution agreement is, in essence, a contract between the parties that provides for the government to release its claims if the counterparty satisfies certain conditions. In SEC matters, these conditions typically include paying a monetary settlement, fully cooperating with authorities, and ceasing the unlawful practices that gave rise to the investigation.

For companies and individuals that are able to meet these conditions, entering into a deferred prosecution agreement with the SEC allows them to avoid the risks and uncertainties of civil or criminal litigation.

When Can Companies Seek Deferred Prosecution Agreements?

Companies and individuals can seek deferred prosecution agreements at various stages of the SEC enforcement process. However, it is best to begin pursuing a deferred prosecution agreement sooner rather than later.

1. The SEC Has Initiated an Investigation or Inquiry

If the SEC has initiated an investigation, this does not necessarily mean that charges are imminent. But companies should defend themselves vigorously and explore the possibility of negotiating a deferred prosecution agreement.

2. The SEC Has Obtained a Grand Jury Indictment

If the SEC has obtained a grand jury indictment, it has secured the evidence it needs to pursue charges. However, it may still be possible to negotiate a deferred prosecution agreement at this stage.

3. The SEC Has Filed Charges in Federal Court

If charges have been filed, it may still be possible to negotiate a favorable deferred prosecution agreement, though the SEC’s willingness to negotiate will depend heavily on the circumstances involved.

When Should Companies Seek Deferred Prosecution Agreements?

This is a question that needs to be answered on a case-by-case basis. If the SEC has clear evidence of wrongdoing and the intent to pursue charges, then it will often be in the targeted company’s best interests to seek a favorable deferred prosecution agreement. Negotiating requires a comprehensive understanding of the relevant facts and law, making experienced federal defense counsel essential.